2019 (11) TMI 416 - HC - Income Tax

Deduction u/s 54 - enhancement of the deduction as the additional cost of construction under Section 54 - only objection raised by the Revenue is that the disputed sum has not been deposited in the capital gain account - HELD THAT - Mere non compliance of a procedural requirement under Section 54(2) itself cannot stand in the way of the assessee in getting the benefit under Section 54, if he is, otherwise, in a position to satisfy that the mandatory requirement under Section 54 (1) is fully complied with within the time limit prescribed therein. The claim of the assessee for deduction of the disputed sum towards the additional construction cost was rejected only on the ground that the said sum was not deposited in the capital gain account. In view of findings Revenue is not justified in making such objection. On the other hand, it has to verify as to whether the said sum was utilised by the petitioner within the time stipulated under Section 54(1) for the purpose of construction. If it is found that such utilisation was made within such time, the Revenue is bound to grant deduction. Therefore, this Court is of the view that the matter needs to go back to the first respondent for considering the issue as to whether the disputed amount, claimed by the assessee as deduction, has been utilised by the petitioner towards the additional construction within the time limit prescribing under Section 54(1) and thereafter, to pass fresh order accordingly in the light of the findings and observations rendered supra. Accordingly, the writ petition is allowed and the matter is remitted back to the first respondent to pass a fresh order accordingly

Summary

Issues Involved:
1. Entitlement to deduction under Section 54 of the Income Tax Act, 1961.
2. Compliance with the procedural requirement under Section 54(2) of the Income Tax Act, 1961.
3. Interpretation of beneficial provisions in tax law.

Detailed Analysis:

1. Entitlement to Deduction Under Section 54 of the Income Tax Act, 1961:
The petitioner, representing a Hindu Undivided Family (HUF), sought enhancement of a deduction of ?1,02,13,527 as the additional cost of construction under Section 54. The petitioner entered into a Development Agreement, releasing a 3/4th share of a property in favor of the developer and retaining a 1/4th share. The petitioner incurred additional construction costs and sought to include these costs in the deduction under Section 54. The Revenue allowed a deduction of ?1.50 crores deposited in the capital gain deposit account but denied the additional claim on the ground that the petitioner did not deposit the disputed amount in the capital gain account.

2. Compliance with the Procedural Requirement Under Section 54(2) of the Income Tax Act, 1961:
The Revenue argued that the petitioner did not comply with Section 54(2), which requires unutilized capital gains to be deposited in a capital gain account scheme to claim the deduction. The petitioner contended that the additional expenditure on construction was incurred within the prescribed three-year period, satisfying the substantial compliance under Section 54(1). The petitioner argued that Section 54(2) is procedural and should not override the substantive compliance with Section 54(1).

3. Interpretation of Beneficial Provisions in Tax Law:
The petitioner relied on the Karnataka High Court's decision in *The Commissioner of Income Tax vs. K. Ramachandra Rao*, which held that substantial compliance with the conditions under Section 54(1) should suffice for claiming the deduction, even if the procedural requirements under Section 54(2) were not fully met. The Revenue cited the Supreme Court's decision in *Commissioner of Customs v. Dilip Kumar and Company*, emphasizing strict interpretation of exemption provisions and the necessity of complying with procedural requirements.

Judgment:
The court held that the compliance with Section 54(1) is mandatory and constitutes substantial compliance for claiming the deduction. Section 54(2) is procedural and should be considered directory. If the petitioner can substantiate that the amount was utilized for construction within the prescribed period, the deduction should be granted without strict adherence to Section 54(2). The court remitted the matter back to the first respondent to verify if the disputed amount was utilized within the prescribed time for construction and to pass a fresh order accordingly. The exercise was to be completed within eight weeks.